The credit rating of Joint Stock Company «United Shipbuilding Corporation» (hereinafter, JSC USC, or the Corporation) is based on support from the state. The Corporation’s rating is set at A-(RU), three notches higher than its standalone creditworthiness assessment (SCA), which is calculated taking into account a strong assessment of the market position and a strong assessment of the business profile. The average level of corporate governance had a neutral impact on the credit rating, while the main constraining factor was the low assessment of the financial risk profile, which is determined by high leverage, low profitability and low debt service, as well as very low free cash flow (FCF).
JSC USC is the largest shipbuilding holding in Russia and includes around 40 planning and design offices and specialized research centers, shipyards, and ship repair and engineering enterprises, on the basis of which the bulk of the domestic shipbuilding industry is consolidated. The Corporation’s enterprises employ around 95,000 people.
KEY ASSESSMENT FACTORS
The strong assessment of the business profile and strong assessment of market position are based on the very high share of the contract base in the structure of the Corporation’s revenues (more than three years’ worth of annual revenues), as well as the moderate level of cyclicality and sales market saturation. The latter is based on, on the one hand, the need to modernize Russia’s navy, and on the other hand, the limited nature of state resources provided for those purposes. When assessing the dependence on subcontracting and components, ACRA took into account the fact that although the Corporation designs and modernizes ships via its own design offices, they are assembled using a significant number of components produced by third parties. JSC USC’s share in the domestic naval shipbuilding market by tons of products shipped in 2020 amounted to around 74%. Diversification of sales markets is assessed as low because sales mainly take place in the domestic market.
The average level of corporate governance is based on the average (in the context of the Russian corporate sector) assessment of such sub-factors as management strategy and risk management system. The Corporation has approved procedures, as well as designated bodies that are responsible for making decisions in these areas and controlling their fulfilment. The Corporation’s development strategy is an integral part of the program to develop the Russian shipbuilding industry, which is being carried out by the state via JSC USC. The management structure is assessed as average due to the concentration of government representatives in the board of directors. The average assessment of the group structure takes into account the presence of subsidiaries and affiliates, as well as transactions with related parties, although these transactions are economically justified. The financial transparency assessment takes into account the fact that JSC USC regularly publishes consolidated IFRS financial statements.
The financial risk profile assessment constrains the credit rating
and stems from the average size of the Corporation’s business (absolute FFO before net interest payments and taxes is below RUB 30 bln), high leverage (the ratio of total debt to FFO before net interest payments was 18.3x in 2020), low profitability (the ratio of FFO before interest payments and taxes to revenues was 4.5% in 2020 compared to 0.5% in 2019), and the low coverage (the ratio of FFO before net interest payments to interest payments was 0.94x in 2020 and negative (-0.57x) in 2019). Low profitability coupled with high leverage and relatively high capital expenditures determine the very low value of FCF (the FCF margin was -13% in 2020).
The Corporation’s liquidity indicator is high due to the availability of free funds in accounts and undrawn limits under credit lines provided by banks.
State support is the reason why three notches have been added to the SCA. ACRA takes into account that there are no legal, economic or other barriers preventing the state from providing support, and also that JSC USC prioritizes the performance of specialized functions to support the activities of the shipbuilding industry, which is strategically important for the state, and participates in the implementation of state programs. In terms of the uniqueness of functions performed by JSC USC, it is important to add that the Corporation is an integral part of Russia’s nuclear deterrent forces. From the point of view of social and economic impact, the Corporation’s role for country’s economy is minor. The state exercises significant strategic control over the Corporation and participates in the coordination of its financial and strategic development plans via representatives. The state has supported and continues to support the Corporation in the form of capital injections and liquidity to the extent necessary for the Corporation to carry out its development strategy.
Realization of revenue and operating cash flow targets in the forecast period (2021–2023);
Total volume of capital investments in 2021–2023 in line with the approved business plan;
Average FFO margin before interest payments and taxes at around 6% in the forecast period;
Continued support from the state through the provision of concessional lending and additional capitalization.
potential outlook or rating change factors
The Stable outlook assumes that the rating most likely will stay unchanged within the next 12–18 months.
A positive rating action may be prompted by:
Ratio of total debt to FFO before net interest payments falling below 5.0x coupled with the ratio of FFO before net interest payments to interest payments exceeding 5.0x;
A negative rating action may be prompted by:
Short-term liquidity ratio falling below 1.0x;
Coverage falling below 2.5x.
Support: SCA plus three notches.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to Joint Stock Company «United Shipbuilding Corporation» for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by Joint Stock Company «United Shipbuilding Corporation», information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and Joint Stock Company «United Shipbuilding Corporation» participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to Joint Stock Company «United Shipbuilding Corporation». No conflicts of interest were discovered in the course of credit rating assignment.